Due to the conflict with Iran, the ongoing war in Gaza and the escalation on the northern border, international ratings agency S&P has announced that it has cut Israel’s credit rating from AA- to A+. In addition Israel’s credit outlook has been downgraded from ‘stable’ to ‘negative.’ The announcement was unexpected, with S&P’s official decision on Israel’s credit rating not expected until May 10.
Why has this happened?
In S&P’s announcement, the agency estimates that the recent rise in the conflict between Israel and Iran increases the geopolitical risks that were anyway high for Israel. Although S&P does not see a broad scale regional conflict, the war between Israel and Hamas and the confrontation with Hezbollah will continue throughout 2024, in contrast to the previous estimation that the fighting would end in no longer than six months.
In addition, the ratings agency sees the government’s fiscal deficit widening to 8% – higher than the government’s own target of 6.6%. “We forecast that Israel’s general government deficit will widen to 8% of GDP in 2024, mostly as a result of increased defense spending. Higher deficits will also continue in the medium term,” S&P wrote. S&P also estimates that Israel’s debt to GDP ratio will reach 66% in 2024, up from 60% last year.
What scenarios does S&P see?
S&P’s fundamental scenario is based on several points: The war between Israel and Hamas continues, probably at a lower intensity, throughout 2024, with routine exchange of fire with Hezbollah on the northern border but no escalation of the direct conflict with Iran or a broader regional conflict in the Middle East.
S&P wrote, before the latest reports of explosions in Iran, “We currently see several possible military escalation risks, including a more substantial, direct, and sustained military confrontation with Iran. Israel is under international pressure to restrain its response to the April 13 attack, while Iran has announced its intention not to escalate. However, in our opinion there remains risks of an accident or miscalculation, especially if there are more exchanges of fire between the two sides.”
Another scenario includes expansion of the conflict with Hezbollah on Israel’s northern border. “Expansion of the current conflicts might present additional defense and social risks for Israel, which could affect a range of economic and fiscal indices, in contrast to our basic scenario.”
What did the other ratings agencies do?
Of the three major international ratings agencies, Moody’s was the first to cut Israel’s rating since the start of the war. In February Moody’s announced the first ever credit rating cut in Israel’s history, as well as cutting the credit outlook to negative. In contrast, Fitch decided last month to leave Israel’s credit rating unchanged but cut the outlook.
What else did the announcement say?
On the positive side, S&P noted that Israel maintains financial strengths, including access to the international capital markets, a current account surplus, a strong net external asset position and significant foreign exchange balances last month, and bonds totaling $8 billion in a variety of terms (five, ten and 30 years). The fact that Israeli exports are largely based on high-tech worked in Israel’s favor, and in the company’s estimation it is not likely to be harmed.
On the negative side, S&P noted that the continued financial support from the US to Israel may be called into question if the differences of opinion regarding developments in Gaza continue. The agency predicts that this year’s economic growth will amount to only 0.5%, compared with 2% last year.
Published by Globes, Israel business news – en.globes.co.il – on April 19, 2024.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.
